IEF 223b - Fixed Income Securities - Spring 1998
Professor: Ron D’Vari
E-mail: rdvari@ssrm.com (preferred)
Phone Message: 351-2030
(will respond the same day, please leave a number and time where you can be reached)
Direct Fax: (617) 351-2279
Office Hours: Thursdays 9:00 to 10:00 PM or by appointment.
ABSTRACT
In this class we focus on capital markets and, in particular, analysis of debt securities and markets,
conventions, mathematics, and relative valuation. Emphasis is placed on factors determining market
expected yields such as default risk, liquidity, terms, optionality, and structure. Market pricing and
yield quotation, day count, and settlement conventions are presented. Valuation of cash market
securities such as money market instruments, treasury, agency, corporate, municipal, mortgagebacked, collateralized mortgage obligation (CMO), eurobonds fixed- and floating-rate securities are
discussed. Fixed income risk measures such as duration and convexity will be derived and applied
to portfolio management.
Foundations of fixed-income portfolio management analytics and strategies such as duration and
convexity management, benchmark comparison, performance measurement, and attribution will be
presented and discussed. Concepts such as benchmark variance and tracking, optimum asset
allocation, risk analysis, and scenario optimization will be introduced.
The basic characteristics and valuation of exchange traded derivative instruments such as interest
rate futures, options, and customized interest rate control contracts such as interest rate swap,
cap/floor/collar agreements are discussed. The institutional and regulatory aspects of cash and
derivative instruments and their applications in financial engineering and capital markets are
studied.
INSTRUCTIONAL MATERIAL
Required Reading Material and Texts
1. Ron D’Vari, “Money and Capital Markets -Vol. I.” - Lecture Notes.
2. Fabozzi, Frank, Bond Markets Analysis and Strategies, 3rd Edition, Prentice Hall, 1996.
3. Ron D’Vari, “Money and Capital Markets - Vol. II.” Supplementary Reading Material and
Articles.
Supplemental Reading
4. Brown, K., Smith, D.J., Interest Rate and Currency Swaps: A Tutorial, The Institute of
Chartered Financial Analysts, 1995.
Professor Ron D’Vari
IEF 223b - Spring 1997
5. Fabozzi, Frank, and Franco Modigliani, Capital Markets: Institutions and Instruments, Prentice
Hall, 1992.
Current Financial Market Events and Data
6. Wall Street Journal, Financial Times, The Economist, and Business Week.
Professor Ron D’Vari
IEF 223b - Spring 1997
PREREQUISITES AND STUDY REQUIREMENTS
Since students’ previous coursework (in particular, Investments - FE 823) and practical knowledge
and exposure to financial markets differ, appropriate reading and study will differ for each student.
The lectures will assume that students:

Be familiar with
 Time value of money, present/future value calculations, and discounting
 Basic bond mathematics
 Basic yield-to-maturity/price relationship of fixed-rate bonds
 Bond price sensitivity concepts such as duration and convexity
 Basic option theory (payoff diagrams, call-put parity, Black and Scholes equation, and
option strategies)
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Read all assigned readings for a class session before attending
Note: 25% of class grade will be based on your class participation
You and your group may be asked questions about the assigned readings and will be
required to provide oral answers. Class will focus on summarizing the important points of
the material and assist students to maximize their learning.
Students are encouraged to consult with instructor if they need advice about most effective
preparation approach for class, exam, and project.
Students will be required to:
 Attempt all homework assignments
 Be familiar with one spreadsheet software
 Bring to class a programmable financial calculator such as HP17BII or a lap-top computer
GRADING BASIS
Grading in the course will be on the following basis:
 Mid-term exam
 Class Project
 Final Exam
 Class Participation
Professor Ron D’Vari
IEF 223b - Spring 1997
25%
25%
25%
25%
SCHEDULE
Session
#1
Dates
1/22
#2
1/29
#3
2/05
#4
2/12
Professor Ron D’Vari
IEF 223b - Spring 1997
Topics/Reading Assignments
 Overview of financial markets
 Money market Yield and Price Calculations
Readings:
1) Chapters 1 & 2, Lecture Notes - Vol I.
2) Chapter 1, Fabozzi BMA&S, 3rd Edition
3) Chapters 1-5 & 19 F&M, 2nd Ed.
(Optional, similar to Fabozzi BMA&S)
4) Bond Market Innovations and Financial Market Intermediation
 Forward Yield Curve Analysis in Money Market Instruments
 Coupon Bond Prices and Yields
 Accrued Interests
Readings:
1) Chapters 2 & 3, Lecture Notes - Vol I.
2) Chapters 2 & 3, Fabozzi BMA&S, 3rd Edition
3) Using Implied Forward Rates in Selection of a CD Maturity
4) The Calculation and Use of Money Market Implied Forward Rates
5) What Practitioners Need to Know About Future Value
Project: Team Formation
 Between Coupon Yield Calculations of Bonds
 Bond Price Volatility
 Duration and Convexity Analysis
Readings:
1) Vol I. of Lecture Notes - Chapter 3 (Cont’d)
2) Vol I. of Lecture Notes - Chapter 4
3) Chapter 4, Fabozzi BMA&S, 3rd Edition
4) Chapter 17, F&M, 2nd Ed. (Optional, similar to Fabozzi BMA&S)
Project: Team Bios
 Duration and Convexity Analysis (Cont’d)
 Approximating Total Return
 Immunization Strategies
Readings:
1) Lecture Notes - Chapter 4 (Cont’d)
2) Chapter 19, Fabozzi BMA&S, 3rd Edition
3) A Note on Approximating Price Movements of Bonds Using Standard
Option Adjusted Duration and Convexity (R.D.)
Session
#5
Dates
2/19
#6
2/26
#7
3/12
(3/05
midterm
recess)
Professor Ron D’Vari
IEF 223b - Spring 1997
Topics/Reading Assignments
 Yield Curve Analysis
 Implied Zero and Forward Rates
 Theories of Term Structure
Readings:
1) Chapter 5, Lecture Notes - Vol I.
2) Chapter 5, Chapter 7 & 9, Fabozzi BMA&S, 3rd Edition
3) Chapters 16-18, F&M, 2nd Ed. (Optional, similar to Fabozzi BMA&S)
Articles:
4) Overview of Forward Rate Analysis - Understanding the Yield Curve: Part 1
5) Market’s Rate Expectations and Forward Rates - Understanding the Yield
Curve: Part 2
6) Does Duration Extension Enhance Long Term Expected Returns Understanding the Yield Curve: Part 3
Project: Investment Objectives and Guidelines, Team Description , Investment
Experience and Qualifications To Be Turned In
 U.S. Treasury Securities: Bills, Notes, Bonds, STRIPS
 Repurchase Agreements
 Treasury Auctions
 Bond Arbitrage, Stripping, and Reconstitution
 Agency Securities
Readings:
1) Chapter 6, Lecture Notes - Vol I.
2) Chapter 6, Fabozzi BMA&S, 3rd Edition
3) Chapter 20, F&M, 2nd Ed. (Optional, similar to Fabozzi BMA&S)
Trading: Mock Trading to Begin By Friday of This Week
Corporate Debt and Credit Analysis
 Different Structures
 Corporate Conventions
 Credit Risk and Spreads
 High Yield Bonds
 Floating Rate Notes (FRNs)
 Default Risk Analysis
Non-U.S. Bonds
 Eurodollar Bonds
 Non-Dollar Bonds
Readings:
1) Chapters 7 and 8, Lecture Notes - Vol I.
2) Chapter 7 & 9, Fabozzi BMA&S, 3rd Edition
3) Chapter 21 & 22, F&M, 2nd Ed. (Optional, similar to Fabozzi BMA&S)
4) Articles On Floating Rate Notes, High Yield, and Global Bonds (Vol. II)
Trading: Mock Trading Continued
Session
#8
Dates
3/19
#9
3/26
Topics/Reading Assignments
 Midterm Review
 Mid-Term Exam (Take Home- To Be Returned in a Week)
Bond Taxation and Municipal Bonds
 Bond Taxation
 Simple Taxable Equivalent Yields (TEY)
 Theoretically Correct TEY
Readings:
1) Chapter 9, Lecture Notes - Vol I.
2) Chapter 8, Fabozzi BMA&S, 3rd Edition
3) Chapter 23, F&M, 2nd Ed. (Optional, similar to Fabozzi BMA&S)
Trading: Refinement of Investment Guidelines,
Actual Portfolio Inception By Friday of This Week ($500MM)
The Mortgage Market
 Mortgage Loans - Fixed, GPM, GEMs, Balloons, and ARMS
 Mortgage Projected Cashflow Analysis
 Risks in Investing in Mortgages
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#10
4/02
Professor Ron D’Vari
IEF 223b - Spring 1997
Mid-Term Take-Home Exam To Be Returned
Readings:
1) Chapter 10, Lecture Notes - Vol I.
2) Chapter 10, Fabozzi BMA&S, 3rd Edition
3) Chapter 24, F&M, 2nd Ed. (Optional, similar to Fabozzi BMA&S)
4) Art.: Elementary Growth Model Valuation Expressions for Fixed Rate
Mortgage Pools and Derivatives
Project: Report 1 - Inception Portfolio Report To Be Turned In
The Pass-Through Mortgage Markets
 Mortgage Pass-through Securities - Agency and Private
 Mortgage Prepayments Benchmark Conventions
 Price - Yield Relation
 Negative Convexity
Readings:
1) Chapter 10, Lecture Notes - Vol I.
2) Chapters 11, Fabozzi BMA&S, 3rd Edition
3) Chapter 25, F&M, 2nd Ed. (Optional, similar to Fabozzi BMA&S)
Project: Report 2 - Week 1 Performance and Week 2 Trade
Session
#11
Dates
4/9
#12
4/23
(4/16
Passover)
#13
4/30
Professor Ron D’Vari
IEF 223b - Spring 1997
Topics/Reading Assignments
The CMO Markets
 Collateralized Mortgage Obligations
Readings:
1) Chapter 11, Lecture Notes - Vol I.
2) Chapters 12, Fabozzi BMA&S, 3rd Edition
3) Chapter 26, F&M, 2nd Ed. (Optional, similar to Fabozzi BMA&S)
Articles:
4) Anatomy of PAC Bonds
5) Understanding CMOS, REMICS, and Other Mortgage Derivatives
6) Risk and Reward in CMOs: An Interest Rate Volatility Approach
Project: Report 3 - Week 2 Performance and Week 3 Trade
 Futures vs. Forwards
 Eurodollar Futures
 Bond Futures, Conversion Factor, Cheapest to Deliver, and Hedging
 Forward Rate Agreements (FRAs)
Readings:
1) Chapter 12, Lecture Notes - Vol. I.
2) Chapters 21, Fabozzi BMA&S, 3rd Edition
3) Chapters 28, F&M, 2nd Ed. (Optional)
Project: Report 4 - Week 3 Performance and Week 4 Trade
Portfolio Close-out This Friday
 Take-home Part of Final To Be Handed Out
 Option Contracts
 Embedded Rate Ceilings, Floors, and Conversion Options in Securities
 Callable/Putable Bonds
 Option Adjusted Spread Analysis
 Interest Rate Swaps - terminology, conventions, and market quotes
 Interest Rate Swap Applications, Valuation, and Risk
Readings:
1) Chapter 12, Lecture Notes - Vol. I.
2) Chapters 22, Fabozzi BMA&S, 3rd Edition
3) Chapters 28 and 29, F&M, 2nd Ed. (Optional)
4) Interest Rate Derivative Securities
5) A model for Valuing Bonds and Embedded Options
6) Chapter 13, Lecture Notes, Vol. I.
7) Chapters 23, Fabozzi 3rd Edition
8) Chapters 29, F&M, 2nd Ed. (Optional)
9) Interest Rate and Currency Swaps: A Tutorial
10) Summer Swap School
Project: Report 5 - Week 4 Performance
Session
#14
Dates
5/03
Suplemental
#15
5/07
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Topics/Reading Assignments
Class Review (Optional)
In-class Final Examination (Open-Book, Open Notes, 1 Hour)
Take-home Final Examinations To Be Returned
Final Project Report Due
Farewell Pot-lock (Bring Soda and Sandwiches)
SUGGESTED ADVANCED TOPICS FOR SELF-STUDY
Topics/Reading Assignments
 Interest Rate Caps, Collars, Floors, and Participation Agreements
 Financial Innovations and Engineering - Structured Notes
 Call Monetization with Swaptions (Swap Options)
Readings:
1) Chapter 14, Lecture Notes, Vol. I.
 Active Bond Portfolio Management Strategies
 Corporate Financial Risk Management
 Interrelationships Between Money Markets, and Derivative Markets
Readings:
1) Lecture Notes - Chapter 15
2) Fabozzi Chapters 17 and 18 (3rd Edition)
Professor Ron D’Vari
IEF 223b - Spring 1997
Outline of Lecture Notes, Vol. I.
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Overview of Financial Markets
Money Market Instruments
 Rate Conventions  Price-Yield Relationships at Issuance and In Secondary Markets
 Holding period, total return calculations, and performance
measurements
 Implied forward rates for CD’s and T-Bills
Bond Prices and Yields
 Yield Conventions
 Yield to maturity, call, and to worst calculations
 Accrued Interest
 Holding period returns, total return calculations, and performance
measurements
Bond Price Volatilities, Risk Measurements, and Portfolio Applications
 Duration
 Convexity
 Non-parallel curve moves and key-rate durations
 Total return estimation
 Immunization strategies
Yield Curve Analysis
 Par curve
 Spot or zero-curve
 Pricing securities using spot-curve
 Implied forward rates and implied forward curve
 Term-structure models
US Treasuries and Agencies
 Primary and secondary markets and auction Process
 Bond arbitrage, treasury stripping and reconstitution
 Federal agencies and nature of their guarantees
 Agency curve
Corporate Debt and Credit Analysis
 Corporate Convention
 Maturities, Structures, and Medium Term Notes
 Credit Rating and Credit Analysis
 Risk Evaluation
 Corporate Spreads
Embedded Option Analysis, Floating Rate Notes
 Embedded Options
 Floating rate notes with caps, floors, and collars
 Index and spread durations
Professor Ron D’Vari
IEF 223b - Spring 1997
Outline of Lecture Notes, Vol. I. -Cont’d
Chapter 9
Bond Taxation and Municipal Bonds
Chapter 10
Mortgage loans and mortgage pass-throughs
 Mortgage types and their cashflow analysis
 Mortgage payments and yield calculation
 Mortgage passthroughs
Prepayment analysis and benchmarks
Cashflow and yield estimations
Price-yield behavior - duration and negative convexity
Collateral Mortgage Obligations
Interest Rate Futures and Options
 Financial Futures
 Forward vs. Futures
 Cash-to-carry
 Eurodollar Futures
 Bond Futures - Conversion factor, cheapest to deliver, and hedging
 Interest rate options
Interest Rate Swaps and Swaptions
 Conventions and market quotes
 Pricing interest rate swaps
 Swap risks
 Swap applications
 Swap designs and structures
 Swaptions
Interest Rate Caps, Floors, and Collars
Financial Innovations and Engineering
 Structured Notes
 Application in corporate finance
Chapter 11
Chapter 12
Chapter 13
Chapter 14
Chapter 15
Chapter 16
Chapter 17
Practice Problems
Practice Problems Solutions
Professor Ron D’Vari
IEF 223b - Spring 1997
LIST OF REFERENCES
BOND MARKET INNOVATIONS:
1. Smith, D.J., Taggart, Jr., R.A., “Bond Market Innovations and Financial Market
Intermediation,” Business Horizons, Vol. 32, No. 6, November/December 1989.
MONEY MARKET INSTRUMENTS AND IMPLIED FORWARD RATES:
2. Daskin, A.J., Smith, D.J., “Using Implied Forward Rates in Selection of a CD
Maturity,” Financial Practice and Education, Fall/Winter, 1991.
3. Smith, D.J., “The Calculation and Use of Money Market Implied Forward Rates,”
The Journal of Cash Management, Vol. 98, No. 5, September/October 1989.
4. Kritzman, M., “What Practitioners Need to Know About Future Value,” Financial
Analyst Journal, May/June 1994.
BOND PRICES, DURATION, YIELD CURVE ANALYSIS:
5. Smith, D.J., “A Note on Bond Price, Accrued Interest, and Duration Calculations
Between Coupon Dates,” FE 822 Class Notes, July 1991.
6. Smith, D.J., “Bias At the Short End of The Yield Curve,” Global Investor, April
1991.
7. Smith, D.J., “An Apartment Story: To Introduce the Study of Spot, Forward, and
Futures Markets, the Term Structure, and Arbitrage,” The Journal of Economic
Education, Summer 1988.
8. Ilmanen, A., “Overview of Forward Rate Analysis - Understanding the Yield Curve:
Parts 1,” Portfolio Strategies, US Fixed Income Research, Salomon Brothers, May
1995.
9. Ilmanen, A., “Market’s Rate Expectations and Forward Rates - Understanding the
Yield Curve: Part 2,” Portfolio Strategies, US Fixed Income Research, Salomon
Brothers, June 1995.
10. Ilmanen, A., “Does Duration Extension Enhance Long Term Expected Returns Understanding the Yield Curve: Part 3,” Portfolio Strategies, US Fixed Income
Research, Salomon Brothers, June 1995.
11. Iwanowski, R., “An Investor’s Guide to Floating-Rate Notes: Conventions,
Mathematics, and Relative Valuations,” Salomon Brothers, September 1995.
12. Smith, D.J., “The Duration of a Bond as a Price Elasticity and a Fulcrum,” The
Journal of Financial Education, Fall 1988.
13. Feinstein, S.P., Smith, D.J., “Immunizing Against Interest Rate Risk Using Macaulay
Duration Statistic: An Assessment,” Working Paper 91-48, August 1991, Boston
University. Prepared for The U.S.-Japan Forum on Financial Strategies in the 1990s,
Osaka, Japan.
14. D’Vari, “A Note on Approximating Price Movements of Bonds Using Standard
Option Adjusted Duration and Convexity,” May 1995.
15. Barber, J.R., “A Note on Approximating Bond Price Sensitivity Using Duration and
Convexity, The Journal of Fixed Income, March 1995.
Professor Ron D’Vari
IEF 223b - Spring 1997
FLOATING RATE NOTES, HIGH YIELD BONDS, GLOBAL BONDS
16. Iwanowski, R. “An Investor’s Guide to Floating Rate Notes: Conventions,
Mathematics and Relative Valuation:,” September, 1995.
17. Fridson, M.S., “Fraine’s Neglected Findings: Was Hickman Wrong,” Financial
Analysts Journal, September-October 1994.
18. Gilson, S.C., “Investing in Distressed Situations: A Market Survey,” Financial
Analysts Journal, September-October 1994.
19. Levy, H., Lerman, Z., “The Benefits of International Diversification in Bonds,” The
International Finance Reader, 2nd Edition, Edited by Kolb, R.W., Kolb Publishing
Company, Miami, Florida, 1993.
MORTGAGE-BACKED SECURITIES AND CMOS:
20. O’Brien, T.J., “Elementary Growth Model Valuation Expressions for Fixed Rate
Mortgage Pools and Derivatives,” The Journal of Fixed Income, June 1992.
21. Smith, D.J., D’Annolfo, “Collateralized Mortgage Obligations - An Introduction,”
Real Estate Review, Vol. 16, No. 1, Spring 1986.
22. Bykhovsky, M., Hayre, L., “Anatomy of PAC Bonds,” The Journal of Fixed Income,
June 1992.
23. Carron, A.S.,“ Understanding CMOS, REMICS, and Other Mortgage Derivatives,”
The Journal of Fixed Income, June 1992.
24. Hancock, M.R.,“Risk and Reward in CMOs: An Interest Rate Volatility Approach,”
The Journal of Fixed Income, June 1992.
OPTIONS, FUTURES, AND FORWARD RATE AGREEMENTS:
25. Hull, J.C., “Options, Futures, and Other Derivative Securities - Interest Rate
Derivative Securities,” Chapter 15, Prentice Hall, Second Edition, 1993.
26. Kalotay, A.J., Williams, G., Fabozzi, F.J., “A model for Valuing Bonds and
Embedded Options,” Financial Analysts Journal, May-June 1993
27. Brown, K., Smith, D.J., Interest Rate and Currency Swaps: A Tutorial, The Institute
of Chartered Financial Analysts, 1995.
28. Babbel, D.F., Zenios, S.A., “Pitfalls in the Analysis of Option-Adjusted Spreads,”
Technical Note, Financial Analysts Journal, July-August 1992.
SWAPS, AND OTHER DERIVATIVES
29. Brown, K.C. , Smith, D.J., “Forward Swaps, Swap Options, and the Management of
Callable Debt,” Article 41, The Financial Derivatives Reader, ed. Robert W. Kolb,
Kolb Publishing Company, 1992. Originally published in The Journal of Applied
Corporate Finance, Vol. 2, No. 4, Winter 1990.
Professor Ron D’Vari
IEF 223b - Spring 1997
30. Anonymous, “Summer Swap School,” Derivatives Strategy, July 18, 1994, Vol. 3,
No. 10/11.
31. Dattatreya, R.E. , Fabozzi, F.J “A Framework for Analyzing Bonds: Horizon Return,
Duration, and Convexity,” Current Topics in Investment Management, 1990 Frank J.
Fabozzi, New Hope, P.A.
32. Biby, Jeffrey “The Handbook of Mortgage Backed Securities”, 4th Edition, 1995,
Probus Publishing Co.
33. Ames, Chris, “Introduction to Asset-Backed Securities,” Lehman Brothers, July 1994.
Professor Ron D’Vari
IEF 223b - Spring 1997
CLASS TEAM PROJECT
Grade Weighting
 Class Project
 Mid Term Exam.
 Final Exam.
 Class Participation
25%
25%
25%
25%
Team Requirements
 Teams of minimum 3 to maximum of 5 persons
 Prefer teams with diverse backgrounds (new and experienced market professionals, if
possible)
Initial Capital
 US$500 Millions
Overview of Investment Management Process
 Setting investment objectives
 Establishing investment policy and benchmark
 Establishing a market analysis methodology
 Market drivers (macro economics, cyclical and long term trends, etc.)
 Interest rate forecast (short and long term)
 Past and future expected returns and volatilities
 Selecting a portfolio strategy
 Duration bet
 Volatility/Convexity bet
 Curve bet (barbell or bullet)
 Sector bets
 Selecting the assets
 Cheap/rich analysis
 Benchmark comparison and variance analysis
 Measuring and evaluating performance
 Performance evaluation
 Performance attribution
Interest rate changes
Sector changes
Selection
 Read Chapters 17-20 of F.J. Fabozzi - Bond Markets Analysis and Strategies
Professor Ron D’Vari
IEF 223b - Spring 1997
Policy Statement
 Each team must prepare a statement of investment policy for themselves to follow.
Investment policy should address as clearly as possible the following issues:
 Client needs and reasons for investment
 Investment horizon
 Return expectations
 Risk tolerance and guidelines in terms of price volatility, loss of principle,
duration, etc.,
 Benchmark (Lehman government, Corporate, etc.)
 Securities allowed to invest in
Futures, options on futures, currency futures, options on currencies
Foreign bonds, junk bonds, callable securities, etc.
 Use of leverage
 Investment policy could be amended as additional experience is gained but need to be
documented.
 Investment policy and its amendments should be included with the final project
report.
Trading Rules
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Portfolios are rebalanced weekly.
Positions are opened and closed based on closing prices and yields reported in the
Friday issue of Wall Street Journal (Thursday late-afternoon or closing prices).
There will be five consecutive trading sessions (weekly).
Decisions to buy and sell have to be made by Sunday of each week.
Portfolios must be marked to market weekly.
Leverage
 No short selling is allowed.
 Leverage is allowed through long positions in interest rate futures and options on
futures.
 Required initial and maintenance margins can be invested in short Treasury Bills with
no haircut (100% of market value is used).
 Writing naked calls are not allowed unless its a covered-call or within a well defined
option strategy (straddle, etc.)
Securities Allowed
 Treasury Bonds, Notes, and Bills
 US Treasury Strips
 Government Agency & Similar Issues (Both noncallable and callable issues)
 Corporate Bonds listed in the Wall Street Journal Bond Market Data Bank
 Mortgage Backed Securities listed in the Wall Street Journal Bond Market Data Bank
Professor Ron D’Vari
IEF 223b - Spring 1997
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Tax Exempt Bonds (most appropriate if your client is subject to federal and state
taxes)
Eurodollar Bonds (if appropriate for diversification)
International Government Bonds in Local Currencies
 Japan
 Germany
 United Kingdom
 Canada
Other Foreign Sovereign Bonds (Only if a team has access to reliable prices)
High Yield Bonds (Only if a team has access to reliable prices)
Exchange Traded Interest Rate Futures
Exchange Traded Interest Rate Options
Currency Futures
Options on Currency Futures
Pricing
 Prices reported in the Friday WSJ which correspond to the Thursday closing late
afternoon prices.
 Mid-market prices should be used with no commission charges or fees.
 Use of any other pricing source should be cleared with instructor prior to their use.
Reporting Requirement
 Weekly
 Trade summary ( brief summary of what was sold and bought)
 Detailed marked-to-market report showing the close-out value of previous week’s
positions (Par holdings, beginning prices, ending prices, market value, and
periodic return)
 Sources of gain and loss
 Current week portfolio composition (par holdings) and prices (clean, accrued, and
total) per security owned.
 Portfolio’s weekly returns (price, coupon, total) by sector (government, strips,
agency, etc.)
 Analysis of Current-week’s portfolio
current yield, yield to maturity, modified duration, duration contribution by
sector (government, strips, agency, etc.)
portfolio weightings (percentage invested in different sectors)
Sector duration contributions
Basis for the portfolio repositioning, if any (investment strategy analysis)
 Significant changes to investment policy
 Final Report
 Executive summary
 Investment objectives
Professor Ron D’Vari
IEF 223b - Spring 1997
 Investment policy, philosophy, and overall strategy (qualitative and/or
quantitative)
 Analysis of overall performance
Performance evaluation
(Qualitative explanation of intended investment results and comparison with
achieved investment results)
Benchmark comparison and comparison with expectations
Total return by sector over the entire period
Performance attribution
Sources of return
(sector weighting, duration, current yield, volatility bets, etc.)
Benchmark Performance Comparison
 Conclusions and Lessons learned
Professor Ron D’Vari
IEF 223b - Spring 1997
Weeks
1-3
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3-7
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8
9-11
12
Final Exam
Date
Professor Ron D’Vari
IEF 223b - Spring 1997
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PROJECT SCHEDULE
Activity
Team formation
Understanding Project Scope
Formulation of Investment Policy
Excel sheets to calculate
Securities:
1. Price
2. Accrued
3. Yield to call and maturity
4. Spreads
Term structure
5. Par curve
6. Zero curve
Portfolio:
7. Sector weightings,
8. Duration contributions,
Convexity contribution
Benchmark Weekly Measurments
9. Sector Weighting
10. Sector Duration
11. Overall and Sector Returns
12. Return Attribution
Performance Measurment and
Attribution
13. Security, Sector, and
Portfolio Returns
14. Return Attribution
 Yield
 Duration
 Residual
15. Performance Comparison
Mock trading
Start of actual trading
Weekly Performance Analysis
 Portfolio and Sectors
 Benchmark and Sectors
Closing Trade
Final Project Report
Output
On 3rd Class hand in
 Team Organization
 Brief Bios
 Task Assignment
 Project Plans
 Investment Guidelines
 Mock Trading
Weekly Report
Weekly Report
Closing Report
Final Project Report